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Trade protection doesn’t have to exclude growth stocks

Trade protection doesn’t have to exclude growth stocks

Business Desk The escalating US-China trade war has sent dividend-rich sectors like utilities higher, but investors don’t need to get all defensive just yet, according to strategists who say there are plenty of growth stocks with some insulation from China. Some investors are seeking safety in domestic US growth stocks ranging from software and online advertising to aerospace and recruitment since President Donald Trump’s May 5 tweets showed that US talks with China were in trouble. While the prospect of a prolonged trade war has shaken the market, investors are also trying to protect themselves from the risk that they could miss out on gains in the event that the United States and China reach a surprise agreement. Because of the difficulty handicapping the chance of a US-China deal, John Praveen Portfolio Manager at QMA in Newark, New Jersey, said he would not “completely sell out” of stocks. But he said: “if I was 5 per cent overweight stocks, I might reduce it to 3 pct and see if I could reduce exposure to semiconductors and technology.” “If you’re looking to avoid the pure dividend play and avoid the China trade narrative, you have to look at stocks that are a pure play on the US economy,” said Peter Kenny, founder, Kenny’s Commentary LLC in New York. Broadly speaking, investors have been raising their defenses. While the S&P has fallen roughly 4 per cent since Trump announced his plan to raise tariffs on Chinese goods in early May, utilities - a low-growth sector with reliably high dividends - has risen more than 2 per cent. But growth-hungry investors are seeking more nimble companies with little exposure to overseas sales or Chinese imports even in the beaten down technology sector, where semiconductor stocks have lead the recent declines. Online advertising platforms and cloud software are two technology segments that would not be directly affected by China tariffs, according to Daniel Morgan, portfolio manager at Synovus Trust in Atlanta. In online advertising, Morgan favors Twitter, Facebook and Snap Inc over Google parent Alphabet, which suspended business with China’s Huawei this week as a result of the trade battle. He also likes software providers such as Salesforce.com, which derives 70 per cent of its revenue from the Americas and only 10 per cent from Asia-Pacific. However, Salesforce.com has fallen more than 5 per cent since the Trump tweets. Another option is Workday Inc, which has risen about 4 per cent since May 5 and derives 75 per cent of its revenue from the United States. Steve Lipper, senior investment strategist at Royce & Associates favors US-facing companies offering services such as recruiting and merger advice due to a strong US labor market and solid merger activity. But while US-facing recruitment firms such as Kforce and ASGN Inc may not be hurt directly by the trade war, Robert W. Baird analyst Mark Marcon notes that they would suffer if tariffs caused the economy to weaken. Instead, Marcon favors domestic payroll software companies such as Automatic Data Processing Inc and Paychex Inc, which tend to do better than recruiters in a downturn. But even if their fundamentals remain strong, payroll companies like Paycom and Paylocity could be vulnerable in a selloff due to relatively high valuations, Marcon said. In industrials - a sector with heavy exposure to China - Burns McKinney, a portfolio manager at Allianz Global Investors in Dallas likes defense stocks such as Raytheon and Lockheed Martin, which could benefit if US-Iran hostilities keep intensifying. Since sectors like utilities have risen so much, Royce’s Lipper is favoring less obvious safe choices. “Be wary when the consensus view is already reflected in valuations,” said Lipper, but he added: “The US economy is so diverse that there are always areas that are insulated from whatever you have a concern about.” China’s stock market will see fewer locked shares become eligible for trading this week. From Monday to Friday, a total of 2.7 billion shares will turn unlocked on China’s bourses, down 36 percent from the past week, according to data from financial information provider Wind Info. The peak of newly unlocked shares will come on Monday when more than 1.5 billion shares will become tradable. China Merchants Securities will have more than 815 million shares becoming tradable Monday, the largest amount this week. Under China’s market rules, major shareholders must wait for one to two years before they are permitted to sell their shares. Chinese financial regulators on Friday took over a bank based in the northern Inner Mongolian region because of its “serious credit risk”. The rare takeover of a domestic lender — announced by the People’s Bank of China and the China Banking and Insurance Regulatory Commission in a joint statement — is a worrying sign for China’s economy which last year slowed to its slowest annual pace in nearly three decades. Baoshang bank had been backed by Tomorrow Group, a financial holding company run by billionaire Xiao Jianhua, according to financial news magazine Caixin, which reported last year that Tomorrow was trying to sell part of its holdings. Xiao was whisked out of Hong Kong into mainland China in 2017, amid a crackdown on financial risk, and has not been heard of since. The regulator’s control of the bank began Friday and will last one year, placing its operations in the custody of state-owned China Construction Bank, the statement said. The regulators said they would guarantee the full amount of personal savings deposits with principal and interest. China’s banks have long published low non-performing loan ratios, but many analysts believe some have papered over the extent of their problems. Wall Street stocks finished another down week on a positive note on Friday, climbing ahead of a holiday weekend despite lingering anxiety over the US-China trade conflict. The Dow Jones Industrial Average climbed 0.4 percent to 25,585.69. But this was not enough to prevent the index from falling for the fifth straight week, its longest such streak since 2011. The broad-based S&P 500 added 0.1 percent at 2,826.06, while the tech-rich Nasdaq Composite Index also edged up 0.1 percent to 7,637.01. After a strong run for the stocks in the first four months of the year, fresh trade war anxiety has roiled markets throughout May as the United States and China have announced new tariff measures amid sharpening rhetoric between Beijing and Washington. The two sides still have not scheduled another round of negotiations, although both sides have vowed to keep talking. “The lack of a trade agreement is probably the biggest thing confronting the market going forward,” said Bill Lynch, director of investment at Hinsdale Associates. “Hopefully we’ll get something soon.” In other disappointing news, data showed sales of US-manufactured goods in April fell to their lowest level in nine months, as American companies sold fewer cars and planes and less factory equipment. Among individual companies, Foot Locker plunged 16 percent after it reported lower-than-expected first-quarter earnings and sales. Analysts described Friday’s trading volume as light ahead of the Memorial Day weekend. US markets will be closed on Monday. The British pound bounced around Friday after Prime Minister Theresa May announced her resignation, while global stocks mostly recovered following a rout in the prior session on US-China trade tensions. Sterling sank below $1.27 after May said she would step down as prime minister on June 7, paving the way for a contest to replace her. But the British currency later recovered and advanced against the dollar and euro. “The pound will bounce around here and there but it won’t be going anywhere fast,” Forex.com analyst Fawad Razaqzada told AFP. “A lot now depends who will be the next leader of the Tories.” The currency could face fresh turmoil, with key Brexiteer and former foreign minister Boris Johnson the front-runner to replace May. Ratings agency Moody’s warned that news of May’s departure “amplifies the uncertainty” over Britain’s withdrawal from the European Union, and “increases the risk of a no-deal Brexit.” Elsewhere, Europe’s major share markets rebounded after the previous day’s sharp-selloff sparked by the China-US trade war and global economic worries. US stocks also nudged higher, although the gains were not enough to offset losses earlier in the week. The Dow retreated for the fifth straight week, its longest losing streak since 2011. After a strong run for the stocks in the first four months of the year, fresh trade war anxiety has roiled markets throughout May as the United States and China have announced new tariff measures amid sharpening rhetoric. The two sides still have not scheduled another round of negotiations, although both sides have vowed to keep talking. “The lack of a trade agreement is probably the biggest thing confronting the market going forward,” said Bill Lynch, director of investment at Hinsdale Associates. “Hopefully we’ll get something soon.” In other disappointing news, data showed sales of US-manufactured goods in April fell to their lowest level in nine months, as American companies sold fewer cars and planes and less factory equipment. (Inputs taken from agencies)

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